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Financial instruments with characteristics of equity

Date recorded:

The project team presented the Board the results of the external review of the staff draft of the ED Financial Instruments with Characteristics of Equity. A small group of external commentators provided more than 600 individual comments on the draft.

The reviewers concluded that the approach lacks principles and thus it would be very difficult to determine the classification of an instrument that was specifically not addressed by the draft. Consequently, these reviewers expressed doubts that the specific guidance in U.S. GAAP could be replaced by this draft. The reviewers also noted that the proposed approach provides in many instances inconsistent results and might lead to structuring opportunities. Finally, the reviewers questioned the proposed specified-for-specified criterion and questioned the relation between this criterion and the fixed-for-fixed criterion currently in IAS 32 Financial Instruments: Presentation.

The Board members noted that the most obvious criticism was the lack of principle, and as such the basic approach to this project needs to be reconsidered. Several Board members questioned whether it was still worth to continue trying to develop a new model and whether the current criteria in IAS 32 amended for the most pressing issues would not provide the appropriate classification. Moreover, several Board members noted that benefits of implementing new model of classification of these instruments would be limited as in majority of cases it would provide the same answers as the current guidance in IAS 32.

The staff noted that in some instances the criticism of IAS 32 was driven by the desire to classify more financial instruments as equity rather than unclear requirements of the Standard itself. On the other hand, the staff noted that such approach would not address one of the objectives of the project - convergence with U.S. GAAP.

The staff suggested that limited amendments of IAS 32 and relevant guidance in U.S. GAAP could lead to comparable outcomes by retaining the different approaches (more extensive guidance under the U.S. GAAP). One IASB member suggested that before the Boards jointly consider the next steps in this project the FASB staff should undertake an outreach in the U.S. regarding their reaction to the guidance in IAS 32 as a less prescriptive, more principle-based approach. Additionally, the IASB staff should identify the most pressing issues identified in relation to the current guidance in IAS 32 that could be addressed by a limited-scope project.

The Boards would discuss the project based on the additional outreach later in the year.

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